Impact of GST on Indian Startups

By Registrationwala

13th April 2017

Goods and Services will usher in the biggest tax reform since 1947. It attempts at integrating all of India economically. And since it is being passed at a time where India has become a hub for budding entrepreneurs, exploring the effects of GST on Indian startups makes all the more sense.

Currently, India has over 4000 startups and forms the third largest startup ecosystem in the world.

Overall, startups should be happy that the GST bill has been passed. There are a few caveats and we will get to them only later in this article.

The good

Taxation is simple

Every state currently has its own taxation rules and regulations, making the entire process a function of geography and hence very cumbersome. GST attempts to simplify it all for the startups. All the indirect taxes will be combined into one, making everyone pay only a single tax. Now compare that to the current scenario, where you are not even aware of the number of taxes you pay. Don't say!

And as a consequence of GST's implementation, the tax calculations will be much simpler, saving time and energy, and encouraging the startups to invest it where it is much more needed.

Simple registration

To start a new business, VAT registration is necessary but it is often a put-off to someone starting up. Different fees need to be paid in each state right now. With GST, there will be a uniform and a much simplified common registration for companies all across India. Entrepreneurs will need to just obtain one simple license. They can do their business in as many states as they like, just that they need to be paying their taxes. That is it. As simple as that.

This should encourage the businesses to think about expanding, since the new format allows easier ease of business in other states too.

Exemption from taxes

According to the current rules, VAT is uniformly application to any business with a turnover that exceeds INR 5 lac. Businesses with a revenue between INR 10 lac and INR 50 lac can opt for the VAT Composition Scheme to lower the tax rate but geez, it is complicated and comes with a lot of terms and conditions that can befuddle you. Also, it might not be suitable to your business.

Under GST, businesses with revenue less that INR 10 lac will be exempted from GST. And businesses with turnovers between INR 10 lac and INR 50 lac will be charged at a lower rate. It is great news for people starting up, since the revenue will only pick up, should your business be successful, and the government ensures through GST that your startup is cotton-wooled until it gets good enough to stand on its own and pay taxes. In more ways than one, the money saved in taxes that be injected into the business, enlarging the scope of the startup multifold.

Improved logistics

Logistics are a major headache to startups.

Firstly, regular, sometimes unnecessary checks , at the border cause delay, resulting in the customer receiving the product late. And in a way, the customer pays for it - through time and money. Secondly, startups are not organized. What big players do is to stock-transfer goods in bulk, thus getting things done in a single delay and also avoiding paying charges of inter-state transit. Startups cannot afford that. They are supposed to be messy. They neither have stock-transfer nor do they have logistics in place to combat the delays. So they have to procure goods through inter-state sales, which makes them bound to pay central sales taxes.

GST aims to eliminate such loopholes. It will make interstate movement cheaper and easier, and most importantly, less time-consuming. So in case of a more seamless movement of goods, the costs associated with maintaining high stocks in local warehouses will also be reduced.

Since the goods can move more seamlessly across the state borders now, logistics will be less of a nightmare, or so is expected. In a research done by CRISIL, it is estimated that the GST - if and when in force - can reduce the logistics cost for the startups by as much as 20%.

The bad

Startups with lesser turnover or startups in the manufacturing sector can have things complicated.

According to the current excise laws, any manufacturing business with a turnover of less than INR 1.5 crore is exempted from paying any sort of duty. After GST comes in full force, this limit - which stands now at INR 1.5 crore - may be reduced to INR 25 lac, in turn killing many a small startups.

Apart from the manufacturing sector, e-commerce sector will be affected too.

Firstly,Tax Collection at Source, or TCS, directs the companies to file quarterly as well as monthly returns, making the compliance issues more complicated. Also, they will need to collect the taxes made from the portal, and it is not an easy job, given they have so many vendors.

Secondly, ecommerce startups are going to suffer because the terms 'operators' and 'aggregators' have been vaguely defined. Operators will need to pay the taxes while aggregators will not need to.

The extra documentation is set to creep in, which will kick up the administration costs, and the burden will ultimately be on the customers, who will be paying higher prices for the goods and services.

When GST is implemented, food prices may shoot up, forcing an inflation of sorts. Food taxes are set to suffer not only because of this, but also because there is no clarity whether "mandi tax" is included in GST or not.

Conclusion

Logistics, retail and automation sectors emerge as clear winners. They will hugely benefit from GST and its enforcement. Warehousing is the next in terms of benefit, as now the inter-state transit and trade taxes will be controlled by the Centre and are set to be reduced, making the entire process easier and cheaper.

The future seems rosy but it is yet to be seen how GST individually impacts different sectors and the startups those sectors house.